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By Chris Hope and Hayley Dixon

Angela Merkel, the German chancellor, this week raised Conservative hopes for the Prime Minister’s European policy by saying that the European Union should discuss returning powers from Brussels to national governments. 

Ministers have begun preparing for the October talks, scheduled for after the German election. Mrs Merkel said that the meeting could be the time to “give something back”. 

The Government is said to have made significant headway for a European wide agreement on benefit reform. 

In recent months Iain Duncan Smith, the Work and Pensions Secretary, visited Germany to discuss the issue, while Mark Hoban MP discussed the matter in Moscow in July with other G20 labour ministers and Theresa May went to Brussels. 

Some MPs are calling on David Cameron to announce the progress as soon as the German elections are over on September 22, which will to coincide with the Conservative Party conference. 

However, despite apparent headway, the European Commission is currently taking Britain to court over accusations it is denying EU immigrants their right to claim unemployment and family welfare benefits which they say they are entitled to under European free movement legislation. 

Mr Cameron and Mr Duncan Smith are said to be outraged over the move, and ministers are fighting the case in the European Court of Justice in Luxembourg. 

A senior Tory source told the Times: “The original interpretation of the EU directive was kept deliberately vague to allow member states to decide what to do. Now the European Commission is trying to impose an interpretation we disagree with. We want to take back the power to decide what to do and believe we are making headway.” 

Changes to EU benefits, which currently cost the taxpayer £155 million, would be a significant win for Mr Cameron. 

A No 10 source said there were no plans to reveal a “wish list” of EU changes for fear that it could generate a backlash among Tory MPs and fellow European leaders. 

Further signs of momentum on Europe include a decision to set an early deadline for the conclusions of a new business taskforce appointed by the Prime Minister, who sources claim are aiming to make recommendations in time for October’s EU Council. 

This will be the first time all 28 EU leaders will meet after the German elections./Telegraph